The global financial landscape is navigating a significant and volatile paradox. For months, markets
have operated within a defensive framework shaped by energy shocks and a hawkish shift in monetary
policy. This week, however, the main driver of global asset prices is not the threat of escalating
conflict, but the growing prospect of peace.
As formal United States (US)-Iran negotiations in Switzerland show encouraging progress, the
geopolitical risk premium that has supported commodity markets throughout the year is rapidly
unwinding. For central banks, however, this de-escalation does not provide an immediate opportunity
to ease policy.
The effects of a supply shock take time to work through corporate earnings and consumer prices.
While headline markets may react quickly to breaking news, underlying inflation pressures move
more slowly, forcing policymakers to keep their defensive guardrails firmly in place.
THE ILLUSION OF RELIEF
The key challenge facing markets this week is that falling commodity prices are colliding with
stubbornly strong domestic data. In the US, newly confirmed Federal Reserve (Fed) Chair, Kevin
Warsh, continues to oversee an uncomfortably tight environment. The latest May Personal
Consumption Expenditures (PCE) data reinforced this challenge, with headline inflation at 4.1% year-
on-year and core inflation remaining elevated at 3.4%.
Even though Brent crude has fallen to multi-month lows, the strength of the US economy remains
evident. Real-time Purchasing Managers Index data recently rose to a multi-year high of 55.7,
highlighting a US manufacturing sector that continues to perform strongly. As a result, bond markets
have largely priced out near-term policy relief, maintaining expectations that the Fed will keep rates
higher for longer through the second half of the year.
THE SOUTH AFRICA OUTLOOK
For South Africa, this global backdrop has created a particularly challenging domestic environment.
Just as global energy pressures began to ease, local inflation data served as a reminder that domestic
price pressures remain elevated. Statistics South Africa reported on Thursday that May producer
inflation accelerated sharply to 7.8% year-on-year, up from 4.8% in April and well above market
expectations.
This significant rise in the Producer Price Index supports the South African Reserve Bank’s (SARB’s)
widely debated decision to raise the repo rate to 7% late last month. SARB Governor, Lesetja
Kganyago’s proactive approach was designed specifically to prevent these pipeline inflation pressures
from becoming more deeply entrenched. While the sharp decline in international oil prices provides
an important cushion for the local economy, elevated producer inflation is likely to keep the SARB
cautious and maintain its hawkish stance to prevent higher manufacturing costs from filtering
through to consumer prices.
MARKETS IN A NUTSHELL
THE WEEK’S KEY THEMES:
Middle East peace progress triggers a major commodities sell-off
US Dollar Index rises to a 13-month high near 101.8
South African producer inflation surprises to the upside at 7.8%
Sticky US PCE data reinforces a restrictive global rate outlook
UK Prime Minister, Keir Starmer, resigns
BONDS
US Treasury yields held firm this week, with the 10-year around 4.49% and the two-year pushing
above 4.20% as markets repriced the Fed path more hawkishly. Although the Fed held its target range
at 3.50% to 3.75% at its June meeting, the outcome was read as anything but dovish. The 2026
inflation projections were revised sharply higher, to 3.6% for headline and 3.3% for core PCE, and the
dot plot now points to roughly one more hike, with a meaningful share of officials still expecting a
2026 increase. Fed Chair Warsh kept the emphasis firmly on price stability, which leaves room for the
central bank to keep interest rates elevated.
United Kingdom (UK) gilts rallied, with the 10-year yield easing to around 4.68% to 4.73%, their
lowest level since mid-March, as a sharp drop in oil prices and softer flash activity data (real-time
data) eased near-term inflation worries. The Bank of England (BoE) held the bank rate at 3.75% in a
seven-to-two vote at its recent meeting, but its tone remains cautious. BoE Governor, Andrew Bailey,
has signalled he is content to wait while warning the BoE will respond promptly if Middle East energy
pressure spills into broader inflation.
In Europe, Germany’s 10-year bund yield hovered near 2.92%, holding below recent highs. The
European Central Bank (ECB) recently lifted rates 25 basis points to a 2.25% deposit rate, citing
energy-driven inflation risk, though markets now price in roughly a 76% chance of no change in July.
Lower oil prices have tempered the rates backdrop.
South African bonds firmed, with the 10-year yield easing toward 8.45% to 8.50%, supported by a
resilient rand, softer oil and May inflation at a benign 4.5%, even after the SARB raised the repo rate
to 7% in May.
In Japan, 10-year Japanese Government Bond yields eased to about 2.62% after the Bank of Japan
raised its policy rate to 1%, its highest level since 1995, with the board leaning toward further hikes
later in 2026.
EQUITIES
Wall Street experienced a volatile and divided trading week, with the S&P 500 and Nasdaq seeing
sharp sector rotation between AI optimism and megacap pressure. Strong gains in semiconductor
stocks, led by Micron's blowout earnings guidance, helped reignite the AI trade, while Alphabet's
worst single day in 13 months and a hotter than expected inflation print weighed on broader tech
sentiment. The S&P 500 ended Thursday down 1.3% for the week and the Nasdaq off 2.9% for the
week, while the Dow held up better at plus 0.6% as money rotated into more defensive and industrial
names.
European equity markets traded resiliently, with the STOXX 600 closing at a fresh record high of
640.21, up about 0.2% week to date, while the EURO STOXX 50 slipped slightly to 6,267.53.
Agricultural chemical company, Bayer, surged as much as 20% on a favourable US Supreme Court
ruling, and semiconductor names rallied in sympathy with Micron's results, while defence and luxury
stocks saw profit taking amid capacity doubts and margin concerns. Early progress in US-Iran peace
talks lifted sentiment, though that optimism faded as the week progressed.
The FTSE 100 closed at 10,529.89, up 0.9% week to date and its highest level since April 20, largely
shrugging off the tech driven volatility hitting other markets thanks to its heavy weighting in banks,
healthcare and commodities. Prime Minister Starmer's resignation added a layer of domestic political
uncertainty, with stocks exposed to the UK economy bearing the brunt of concerns around likely
successor, Andy Burnham's, fiscal stance.
The JSE Top 40 struggled to establish a clear direction, closing at 102,624, down roughly 1.8% for the
week, as global risk aversion and weaker commodity prices pressured resource and mining shares, led
by Gold Fields and Impala Platinum. Financial names found some support, with FirstRand indicating
that its revenues from interest charged on lending has exceeded previous forecasts.
COMMODITIES
Brent crude recorded its weakest monthly performance since 2022, falling sharply to around
$74/barrel. The decline reflects the rapid unwinding of geopolitical risk premiums as oil tankers
resume movement through the Strait of Hormuz amid advancing peace talks. However, some buying
from manufacturers looking to secure supply has helped limit further downside.
Gold prices also came under pressure, breaking below their recent trading range to move toward
$4,000/ounce. Higher US yields, a stronger dollar, and reduced demand for safe-haven assets have
weakened the metal’s near-term support.
CURRENCIES
The US Dollar Index is holding firm, near 101, close to its strongest level since May 2025, as a hawkish
Fed continues to anchor sentiment. Although the Fed left rates on hold, upgraded inflation projections
and the prospect of a further hike later in 2026 is keeping US rate support intact. A sharp drop in oil
prices, after US-Iran tensions eased and supply risk receded, has softened inflation worries and
trimmed safe-haven demand, yet the hawkish policy signal remains the dominant driver, leaving the
dollar in demand.
The euro has come under renewed pressure, drifting from around $1.14/€ to a week’s low near
$1.1325/€ before steadying close to $1.136/€. The ECB’s recent 25-basis point hike to a 2.25% deposit
rate has largely been digested, and with the bank expected to be nearer the end of its tightening cycle,
the focus has shifted back to the wide US rate advantage. Sluggish eurozone growth against a resilient
US backdrop is keeping the single currency on the back foot.
Sterling slipped from around $1.323/£ toward a midweek-low near $1.314/£, ending close to
$1.317/£. While the BoE’s seven-to-two hold at 3.75% was hawkish, falling gilt yields, softer oil and a
firmer dollar are weighing on the currency, with energy-related inflation risks still in focus.
The rand has weakened from around R16.43/$ to near R16.60/$, pressured by lower gold and
platinum prices and a stronger dollar, even as falling oil prices has offered some relief ahead of the
SARB’s July meeting.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.47
EUR/ZAR: 18.74
GBP/ZAR: 21.74
BRENT CRUDE: $75.01
GOLD: $4,038
Written by Citadel Equity Analysts, Liam Roubach, Alex Frey and Katlego Dinake.
Sources: BBC, FXStreet, GoldmanSachs, Investing.com, Moneyweb, Morningstar, The Japan Times,
The World Economic Forum, Trading Economics, TradingView and XTB.
